Putting these arguments and assumptions in context, defendant argues
that the liberal standard pertaining to the amendment of pleadings should
apply so that defendant may amend its answer to assert counterclaims
against Micelli and Sadlon individually. Defendant maintains that there
has been no undue delay, and that any prejudice which results from the
amendment is through the fault of the plaintiff, Micelli and Sadlon
rather than defendant.

PSCC argues in opposition to the motion that this Court's discussion of
the contours of the corporation by estoppel concept applies equally to
defendant's ability to amend the counterclaim at this juncture. (See
Pl.'s Ltr. Br. in Opp'n.) PSCC maintains that it would be unfair to
impose personal liability upon Micelli and Sadlon because Delavau
believed at all times that it was dealing with a bonafide corporation.
(Id.) Moreover, PSCC points out that if we were to permit amendment, it
would delay the proceedings in this matter because Sadlon and Micelli
would likely have to retain separate counsel.

DISCUSSION

The procedural posture of this case demonstrates that the instant
motion, which is styled as a "motion for leave to file a second amended
answer," must be treated as a motion to amend the final pretrial order.
The final pretrial order in this case was filed in this Court on October
1, 1997. Federal Rule of Civil Procedure 16(e) prescribes the role of
the pretrial order and the general basis for its modification:

(e) Pretrial Orders. After any conference held
pursuant to this rule, an order shall be entered
reciting the action taken. This order shall control
the subsequent course of the action unless modified by
a subsequent order. The order following a final
pretrial conference shall be modified only to prevent
manifest injustice.

If the moving party has not demonstrated that manifest injustice will
result without amendment, then "[i]t is within the district court's
`discretionary power' to allow for amendment of a pretrial order." See
Daily v. Hyster Co., No. 87-1509, 1990 WL 250528, at *2 (D.N.J. Dec. 21,
1990) (Wolin, J.); see also Joy Mfg. Co. v. Sola Basic Indus., Inc.,
697 F.2d 104, 109 (3d Cir. 1982). In exercising their discretion, the
Third Circuit has advised the district courts in this circuit to consider
"the prejudice or surprise in fact of the nonmoving party, and the
ability of that party to cure the prejudice[,]" among other factors.
Beissel v. Pittsburgh & Lake Erie R.R. Co., 801 F.2d 143, 150 (3d Cir.
1986); Berroyer v. Hertz, 672 F.2d 334, 338 (3d Cir. 1982); Joy Mfg.
Co., 697 F.2d at 109. Given the procedural posture of this litigation, we
must analyze defendant's application under the standard set forth in Rule
16(e).

Prior to evaluating whether defendant has demonstrated to the Court
that manifest injustice will result if the Court does not permit the
amendment, in view of the nature of the amendment sought, we must address
a preliminary question. Specifically, we must determine whether, under
New Jersey law, defendant/ counterclaimant has presented a sufficient
legal basis upon which this Court could impose joint and several
liability upon Sadlon and Micelli for any damages awarded to defendant on
its counterclaims asserted in this action against PSCC. See Petree, 831
F.2d at 1192 (noting that district court denied motion to amend pretrial
order where plaintiff attempted to assert new claim on eve of trial which
was without support in Pennsylvania law).

Our prior Memorandum Opinion did not rule on the issue of whether the
de facto corporation concept was viable under New Jersey law because we
did not have to do so in order to reach our conclusion.*fn6 However, it
appears that this motion now requires us to answer that question in order
to determine Sadlon and Micelli's potential individual liability in
connection with the counterclaims asserted by defendant.

The Court's prior Memorandum Opinion set forth the reasons why it
appeared that the de facto corporate concept had been abolished by §
50 of the Model Act, which is codified in New Jersey under N.J.S.A.
§ 14A:2-7(2). Other courts have found, based upon the same or
similar language,
that the state legislature abolished the doctrine of de facto corporation
by enacting a counterpart to § 50 of the Model Act. See Timberline
Equip. Co. v. Davenport, 267 Or. 64, 514 P.2d 1109, 1111 (1973)
(interpreting similar language found in Oregon statute, O.R.S. §
57.321, to have abolished de facto corporate concept in Oregon; court did
not address whether same language abolished corporation by estoppel,
noting that the two concepts are different); American Vending Servs. v.
Morse, 881 P.2d 917, 923 (Utah Ct.App. 1994) (interpreting analogous
provision of Utah's Model Business Corporations Act, § 16-10-51 (now
found at § 16-10a-203), said provision being modeled after § 56
of the Model Act, the successor to § 50 of the Model Act); see also
Robertson v. Levy, 197 A.2d 443, 446-47 (D.C.App. 1964) (interpreting
identical language found in § 29-921c, now codified at § 29-349,
and holding that language abolished the concepts of corporation by
estoppel and de facto corporation). Moreover, the Commissioner's Comments
appended to this section of N.J.S.A. states that this passage "virtually
eliminates the distinction between de jure and de facto corporations."
(Mem. Op. at 9 (citing Commissioners' Comment — 1968) (emphasis in
original).)

We conclude that the doctrine of de facto corporate status no longer
exists in New Jersey. While we recognize that at least two New Jersey
Appellate Division opinions have discussed and/or applied the de facto
corporation concept since the codification of the Act,*fn7 it does not
appear that the question of the doctrine's remaining vitality after the
enactment of the Act was squarely presented to those courts or addressed
in either case. Moreover, while instructive, we are not bound by
Appellate Division cases in interpreting state law. See Fleck v. KDI
Sylvan Pools, 981 F.2d 107, 113 (3d Cir. 1992) (noting that we can rely
upon decisions from intermediate appellate courts if persuasive, but are
not bound to do so, especially where the court is convinced that the
state's supreme court would hold otherwise). A federal district court
sitting in diversity is faced with the difficult task of predicting how
the New Jersey Supreme Court would resolve this issue. McKenna v. Pacific
Rail Serv., 32 F.3d 820, 825 (3d Cir. 1994). We believe that the New
Jersey Supreme Court would align itself with those courts which have
abolished the de facto corporate concept in view of the language found in
the last sentence of § 14A:2-7(2).*fn8

The next question is whether, given our ruling that there was no de
facto corporation during the relevant time period, defendant should be
permitted to amend the pretrial order and assert counterclaims against
Sadlon and Micelli individually. Delavau argues that in the absence of a
corporation, PSCC should be treated as a partnership and its partners
should be held personally liable for PSCC's tortious conduct (i.e.,
negligent and/or intentional misrepresentation) and alleged breach of
contract.*fn10 Delavau maintains that both Sadlon and Micelli are
partners in PSCC. With respect to Micelli, defendant argues that the fact
that she was entitled to a share of the profits in PSCC is prima facie
evidence that she was a partner in PSCC, and thus should be jointly and
severally liable for Sadlon's conduct (while acting on behalf of PSCC).

There is authority in New Jersey which supports the proposition that
"[w]hen a corporation de jure or de facto does not exist, persons doing
business in an assumed corporate capacity are partners and liable as
partners." Culkin v. Hillside Rest., 126 N.J. Eq. 97, 99, 8 A.2d 173, 175
(Ct.Chan. 1939); see also Federal Advertising Corp. v. Hundertmark,
109 N.J.L. 12, 14, 160 A. 40 (1932) ("When, therefore, the defendants
authorized the sign and used the Home Electric Products, Inc., as a
name, they in effect were constituting themselves as agents of a
nonexisting principal, and became personally liable."). New Jersey's
Uniform Partnership law defines a partnership as "an association of two
or more persons to carry on as co-owners a business for profit."
N.J.S.A. § 42:1-6. A partnership is created "when persons join
together their money, goods, labor or skill for the purpose of carrying
on a trade, profession or business, and where there is community of
interest in the profits or losses." Farris v. Farris
Eng'g Corp., 7 N.J. 487, 498-99, 81 A.2d 731 (1951).

Under the partnership statute, receipt of a share of profits of a
business is prima facie evidence that one is a partner in the business.
N.J.S.A. § 42:1-7(4). However, the statute also states that:

no such inference shall be drawn if such profits were
received in payment:

a. As a debt by installments or otherwise,

b. As wages of an employee or rent to a landlord,

c. As an annuity to a widow or representative
of a deceased partner,

d. As interest on a loan, though the amount of payment
vary [sic] with the profits of the business,

e. As the consideration for the sale of the good-will
of a business or other property by installments or
otherwise.

It appears that defendant's motion to amend has support in the relevant
case law and statutory authorities. of course, we cannot determine at
this stage of the proceedings the exact nature of PSCC during the
relevant time period, i.e., whether it is a partnership or sole
proprietorship. Moreover, we will not speculate or make any rulings at
this juncture with respect to the role Micelli played in the conduct of
PSCC's affairs, and whether or not she should be considered a partner who
may be subject to joint and several liability on any judgment in
Delavau's favor on the counterclaims. However, defendant has presented
the Court with a legal theory which, if supported by the proofs presented
at trial, could serve as a basis for imposing personal liability upon
Micelli and Sadlon as partners in PSCC.*fn11

We wish to make it clear, however, that we express no ultimate opinion
as to defendant's ability to hold those individuals liable in connection
with the counterclaims. Our opinion today merely permits defendant to
file an amended pleading which includes counterclaims against Sadlon and
Micelli individually. The determination on the merits of any such claim
against these individuals will be made at the time of the Court's final
judgment, and will depend upon the proofs which are presented at trial.
Suffice it to say at this juncture that defendant has presented a
potential theory of individual liability which finds support in the case
law and relevant statutory authorities.

Our website includes the main text of the court's opinion but does not include the
docket number, case citation or footnotes. Upon purchase, docket numbers and/or
citations allow you to research a case further or to use a case in a legal proceeding.
Footnotes (if any) include details of the court's decision.

Buy This Entire Record For
$7.95

Official citation and/or docket number and footnotes (if any) for this case available with purchase.